Previously, the Fifth Circuit issued an opinion on October 31, 2023 finding that the SEC violated the Administrative Procedure Act “when it failed to respond to petitioners’ comments and failed to conduct a proper cost-benefit analysis.”  The court remanded the rule to the SEC with a direction to correct the defects in the rule within 30 days. The SEC was unable to correct the defects in the rule within 30 days and requested an indefinite extension of time to do so, which the Court denied. It is currently unclear whether the SEC will appeal the Fifth Circuit’s order.

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Schedule 13D is required for persons who acquire more than 5% beneficial ownership of a class of equity securities registered under Section 12 of the Exchange Act and who have the purpose or effect of changing or influencing the control of the issuer. Schedule 13G is a short-form alternative to Schedule 13D for certain categories of filers who have a passive or limited investment intent. These categories include Qualified Institutional Investors (QIIs), Exempt Investors, and Passive Investors, which are defined in more detail in the rules. The table below from the adopting release summarizes the changes with respect to Schedule 13D and 13G filings:

The SEC extended existing guidance regarding security-based swaps and beneficial ownership of the underlying reference securities to other cash-settled derivative securities. The adopting release states that, if the instrument confers voting or investment power over the reference securities or the right to acquire such power, or if the instrument is acquired with the purpose or effect of divesting or preventing the vesting of beneficial ownership as part of a scheme to evade reporting requirements, the holder may be deemed a beneficial owner of the underlying reference securities.  In addition, the amendments clarify that cash-settled derivative securities, including total return swaps, are required to be disclosed in Item 6 of Schedule 13D.

Further, the SEC reiterated its view that that Sections 13(d)(3) and 13(g)(3) of the Exchange Act do not require an express agreement for persons to be a “group” for purposes of Sections 13(d) and 13(g) and that, depending on the particular facts and circumstances, two or more persons taking concerted actions for the purpose of acquiring, holding or disposing of securities of an issuer may be sufficient to constitute the formation of a group. Rules 13d-5(b)(1)(iii) and (b)(2)(ii) were also amended to impute acquisitions by group members to the group at any time after the group has been formed (excluding intragroup transfers of securities).

Finally, the amendments require the use of a structured data format, specifically XML, for Schedule 13D and 13G filings to improve the accessibility, usability, and comparability of the information reported by filers and to facilitate the analysis and dissemination of the data by the SEC, investors, and other market participants.

The amendments will be effective 90 days after the date of publication in the Federal Register. The compliance date for the structured data requirement is December 18, 2024, with a voluntary compliance period starting on December 18, 2023. The compliance date for the revised Schedule 13G filing deadlines is September 30, 2024.

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In particular, the SEC targeted failures to timely file Forms 4 and Schedules 13D and 13G. Officers, directors and greater-than-ten-percent stockholders are required to report transactions in a public company’s securities on Form 4, and greater-than-five-percent stockholders are required to make reports on Schedule 13D or 13G with respect to their holdings of and transactions in public company equity securities. The individuals charged by the SEC in these enforcement actions had between 14 and 65 late filings, each.

Late or missed Forms 4 can impact public companies, as well, since they are required to disclose any late filings or known failures to file by insiders in their annual reports or proxy statements.  Companies can also be held responsible for untimely filings if they contribute to their officers’ or directors’ failure to make required reports or fail to adequately police repeated failures by their officers and directors to make timely filings.

Conduct underlying the charges against the public companies included failures to accurately report late or missed filings. In one instance, although the company disclosed that untimely filings were made and included a table providing information about the transactions that should have been reported, it failed to list all the required information, including the number of late reports and the number of unreported transactions for each individual.

In several of the actions brought by the SEC, the company was found to have contributed to late or missed Form 4 filings by its officers and directors because of its failure to perform tasks it voluntarily agreed to take on behalf of its officers and directors.  Two of the enforcement actions brought by the SEC faulted the company for repeatedly failing to ensure that its insiders made timely filings.

Gurbir S. Grewal, Director of the SEC’s Division of Enforcement, reiterated that these enforcement actions serve not only as a reminder that these reporting obligations are mandatory, but also that “[t]imely disclosure of insider transactions is critically important to both investors and the fair, orderly and efficient operation of our securities markets.” Officers, directors, major stockholders, and public companies should heed this warning and be sure that they have implemented effective processes to ensure compliance with ownership reporting requirements.

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On August 25, 2023, the SEC issued new compliance and disclosure interpretations (C&DIs) related to (i) the December 2022 Rule 10b5-1 amendments and (ii) the related issuer disclosure requirements.  The full text of the Rule 10b5-1 amendment C&DIs and the issuer disclosure C&DIs is available here and here, and our December 2022 blog post regarding the Rule 10b5-1 amendments is available here.

Rule 10b5-1 Amendment C&DIs

Rule 10b5-1(c)(1)(ii)(B)(1) provides that the required cooling-off period for directors and officers is the later of 90 days after the adoption of a 10b5-1 plan or “[t]wo business days following the disclosure of the issuer’s financial results in a Form 10-Q or Form 10-K for the completed fiscal quarter in which the plan was adopted.” C&DI 120.29 clarifies that the filing date of the Form 10-Q or 10-K disclosing the financial results for the period in which a 10b5-1 plan is adopted does not count as the “first business day”. Per the C&DI, if the relevant form is filed on a Monday, trading may commence under the 10b5-1 plan on Thursday (assuming no intervening Federal holidays). Whether a form is filed before or after trading opens on a given day has no bearing on the calculation. However, filing a Form 10-Q or 10-K after 5:30pm Eastern time (the Edgar filing deadline) would cause the “filing date” to fall on the following business day, which could extend the cooling-off period (i.e., if the relevant form is filed after 5:30pm Eastern time on Monday, trading could not commence until Friday).

For purposes of the restriction on overlapping plans, C&DI 120.30 indicates that a 401(k) plan participant relying on Rule 10b5-1 for open market matching grant purchases could still take advantage of the Rule 10b5-1 affirmative defense for a concurrent 10b5-1 plan for purchases and sales on the open market, so long as the 401(k) plan administrator (and not the plan participant) is directing the 401(k) open market purchases to make matching grants of the issuer’s common stock to the plan participant.

With respect to the new Form 4 check box requiring reporting persons to indicate whether reported transactions were made pursuant to a 10b5-1 plan, C&DI 120.31 clarifies that reporting persons are not required to check the box for transactions made pursuant to a trading plan that was adopted prior to the effective date of the Rule 10b5-1 amendments.

Issuer Disclosure C&DIs

C&DI 133A.01 clarifies that the required disclosure of plan terminations pursuant to Item 408(a)(1) of Regulation S-K does not apply to a plan that terminates due to its expiration or completion (e.g., the plan ends by its terms and without any action by an individual).

Item 408(a) of Regulation S-K requires disclosure of whether any director or officer adopted or terminated a Rule 10b5-1 trading arrangement or a non-Rule 10b5-1 trading arrangement during the fiscal quarter.  C&DI 133A.02 provides that Item 408(a) applies to any Rule 10b5-1 trading arrangement or non-Rule 10b5-1 trading arrangement covering securities in which an officer or director has a direct or indirect pecuniary interest that is reportable under Section 16 that the officer or director has made the decision to adopt or terminate.

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The SEC’s proposed new rules have, however, been met with significant pushback.  SEC Chairman Gary Gensler recently testified before Congress that the SEC has heard the concerns voiced by various stakeholders and constituents in the public comment process “loud and clear.” The SEC has now signaled that it will finalize the proposed climate disclosure rules in October 2023. Responding to public comments, and no doubt mindful of recent Supreme Court decisions on federal agency rule-making authority, the SEC may pull back on some parts of its original proposal.

Background.

In March 2022, the SEC proposed amendments to Regulations S-X that would both enhance and standardize public companies’ climate-related disclosures (“Climate-Related Disclosures”).  These proposed disclosures would require public companies to report on climate-related risks, climate risk-management practices and processes, and any current or potentials impacts that climate-related events will have on a public company’s strategy, business model, outlook, and finances.

The proposal requires companies to report information related to “Scope 1” direct carbon emissions (think fuel use and greenhouse gases), “Scope 2” indirect carbon emissions (e.g., purchased energy and electricity), and for some companies to report on information related to “Scope 3” carbon emissions (i.e., upstream and downstream emissions not resulting from or produced by company activities, such as global supply chains and any indirect impacts caused by their products or services).

The proposal would add a significant new compliance dimension to disclosures by public companies that have decarbonization goals or adopted climate action plans but may also indirectly affect suppliers to and customers of such public companies to the extent such plans contemplate scope 3 reductions. Many such companies further those goals through transacting for carbon offsets and entering into renewable energy attribute purchase agreements including ‘virtual power purchase agreements’ or VPPAs. The proposal could drive increased demand for such transactions from public companies as well as their suppliers and their customers. Attorneys in Foley Hoag’s Energy and Climate practice group has guided our clients through such transactions and will be working with our public markets attorneys as the regulatory picture becomes clearer.

Additionally, the proposal would require additional footnote disclosures to detail the impact of climate-related events and transition activities on relevant line items in the financial statements (“Footnote Disclosures”).  The Footnote Disclosures would require companies to disclose in their financial statements:

• All positive and negative impacts of climate-related events, such as severe weather events and other natural conditions, including flooding, drought, wildfires, extreme temperatures, and sea-level rise, exceeding 1 percent of the related line item.
• All positive and negative impacts on transitions activities, such efforts to reduce greenhouse gas emissions and progress towards the company’s climate-related goals, exceeding 1 percent of the related line items.
• Expenditures related to mitigating the risk of severe weather events and other natural conditions and transition activities.
• How severe weather events and other natural conditions and transition activities affected estimates and assumptions.

The Footnote Disclosures would not only impose additional responsibilities on public companies. Given the requirement of additional disclosures in the footnotes to audited financial statements, independent auditors would also need to grapple with the new disclosure requirements, adding procedures to their audit program designed to test the new required disclosures.

In May 2022, the SEC also proposed enhanced disclosure requirements for funds and advisers incorporating ESG factors into their investment portfolios and strategies (“Enhanced Funds Disclosure”).  At its core, the proposed Funds Enhanced Disclosure rule creates additional disclosures for certain ESG funds to address “greenwashing,” where entities deceive consumers to believe they are more “environmentally friendly” than the facts support. Essentially, the more funds and advisers hold themselves out as ESG focused, the more transparency and detailed disclosures would be required through the proposed Enhanced Funds Disclosure rules.

These proposed climate disclosure rules have been a long time coming, but there have been recent signals that the end – at least in terms of publishing a final set of rules – is in sight.  In June 2023, the White House’s Office of Management and Budget, Office of Information and Regulatory Actions released its Spring 2023 Unified Agenda of Regulatory and Deregulatory Actions.  Included among the items listed on the Unified Agenda was the SEC’s proposed Climate-Related Disclosure rule and the proposed Enhanced Funds Disclosure rules, indicating we can expect a final rule on both topics to be published in October 2023.

Concerns about the SEC’s focus on ESG.

When finalized in October, the Climate-Related Disclosures will likely have been scaled back to some degree from the original proposal.  First, the SEC has received over 15,000 comments on its proposal, many of which expressed particular concern over the potential expansion of SEC authority in ways that would be unprecedented.

SEC Chairman Gensler recently testified before Congress that the SEC has heard the concerns stated by members of Congress, the agricultural community, and small businesses “loud and clear” about the proposed Climate-Related Disclosures, especially around the Scope 3 emissions disclosures which has been particularly contentious.  Gensler stated that the rule that the SEC is trying to finalize is aimed at “bring[ing] comparability and consistency about the public companies.”  However, he also acknowledged that the SEC received “a lot of comments,” including comments providing “alternatives to ensure that we don’t inadvertently . . .  [reach] nonpublic companies.”[1]  Recent reporting suggests that one of Chairman Gensler’s primary concerns about any final Climate Related Disclosure rule is the backlash the SEC might receive in the form of legal challenges.[2]

Many opponents of Climate-Related Disclosures argue that the SEC went too far in their statutory authority, even beyond Scope 3’s possible reach into nonpublic companies.  The SEC proposed these Climate-Related Disclosures under their well-established authority to require public companies to disclosure information that is “necessary or appropriate in the public interest or for the protection of investors” as provided by them in the Securities Act, 15 U.S.C. 77g, and the Securities and Exchange Act, 15 U.S.C. 78l, 78m, 78o.  However, it is possible that opponents would seek to limit the SEC’s ability to require these Climate-Related Disclosures under the developing “major questions doctrine.”

The major question doctrine, used as reasoning to limit agency decision-making powers in recent United States Supreme Court cases, such as West Virginia v. Environmental Protection Agency, citation, 597 U.S. ­­­____ (2022), National Federation of Independent Business v. Occupational Safety and Health Administration, 595 U.S. _____ (2022), and Biden v. Nebraska, 597 U.S. ­­­____ (2023), looks to the “history and breadth” of the agency’s statutory authority and the “economic and political significance” of the agency’s action to determine whether Congress intended to confer such authority to the agency.

In West Virginia, the Environmental Protection Act (EPA) faced a challenge to their Clean Power Plan rule, which addressed carbon dioxide emissions from existing coal and gas power plants. The EPA promulgated this rule under Section 111(d) of the Clean Air Act, which authorizes the EPA to regulate certain pollutants from existing coal and gas power plants.  The Supreme Court struck down the Clean Power Plan, which the court interpreted as trying to compel power generating capacities from coal and gas to wind and solar.  The Supreme Court reasoned that Congress would not delegate, or intend to delegate, “such a sweeping and consequential authority” to make decisions of political and economic signification in a cryptic or vague manner.  According to the Court, the EPA must point to more than “a merely plausible textual basis for the agency action” to show that they have “clear congressional authority” to promulgate the Clean Power Plan.

Considering these recent decisions, public attention on the SEC’s rulemaking around climate-related and other ESG matters, and the SEC’s decision to scale back other rules facing broad opposition,[3] it seems likely that we will get a modified version of the proposed Climate-Related Disclosures, especially regarding the Scope 3 disclosures.

Looking Ahead – Proposed Rules on “Human Capital”

As we look at the upcoming rules, the SEC has also put an additional focus on human capital disclosures. The SEC believes that human capital is a material resource for companies and an important disclosure for investors, and it emphasized a principles-based approach to the disclosure. We will continue monitoring updates from the SEC and any related news closely and provide additional alerts with the latest developments.

[1] Jessica Corso, SEC’s Gensler Calls CFTC ‘Not As Robust’ on Crypto, Law360 (July 19, 2023).

[2] Declan Harty, SEC’s Gensler weighs scaling back climate rule as lawsuits loom, Politico (Feb. 4, 2023).

[3] See Goldberg et al., SEC Final Share Repurchase Disclosure Rules Less Burdensome Than Expected, Harvard Law School Forum on Corporate Governance.

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Like the proposed SEC rule, the Bill would require certain businesses to disclose their emissions in their annual reports.  To accomplish this, the Bill requires the California Air Resources Board (“CARB”) to develop and adopt regulations requiring partnerships, corporations, LLCs, and other business entities with total annual revenues exceeding $1,000,000,000 that do business in California (“reporting entities”) to publicly disclose their emissions of greenhouse gas (GHG) annually. CARB would be required to develop and adopt regulations requiring reporting entities to annually disclose and verify to the emissions reporting organization all of the reporting entity’s scope 1, scope 2, and scope 3 emissions by January 1, 2025.

In specific, the Bill requires the following:

• Starting in 2026 or a date to be determined by CARB, all reporting entities must annually publicly disclose its scope 1 and scope 2 emissions for the prior year, and its scope 3 emissions for that same calendar year no later than 180 days after that date using the Greenhouse Gas Protocol Corporate Accounting and Reporting Standard and the Greenhouse Gas Protocol Corporate Value Chain (Scope 3) Accounting and Reporting Standard developed by the World Resources Institute and the World Business Council for Sustainable Development.
  • Reporting timelines must consider stakeholder input and take into account timelines by which reporting entities receive the reportable data, as well as the capacity for independent verification to be performed by an approved third-party auditor.
• The inclusion of certain definitions, including the following particularly significant definitions:
  • Reporting entity: a partnership, corporation, LLC, or other business entity formed under the laws of this state, the laws of any other state of the US or laws of DC, or under an act of the Congress with total annual revenues in excess of one billion dollars ($1,000,000,000) and that does business in California. (Note that the definition appears to exclude foreign corporations.)
  • Scope 1 emissions: all direct greenhouse gas emissions that stem from sources that a reporting entity owns or directly controls, regardless of location, including, but not limited to, fuel combustion activities.
  • Scope 2 emissions: indirect greenhouse gas emissions from electricity purchased and used by a reporting entity, regardless of location.
  • Scope 3 emissions: indirect greenhouse gas emissions, other than scope 2 emissions, from activities of a reporting entity that stem from sources that the reporting entity does not own or directly control and may include, but are not limited to, emissions associated with the reporting entity’s supply chain, business travel, employee commutes, procurement, waste, and water usage, regardless of location. (It is unclear whether this definition includes emissions associated with the use of a product manufactured by an entity, such as the combustion of fuel.)
• The disclosure must include the name of the reporting entity and any fictitious, trade, or assumed names, and logos.
• The disclosure must be independently verified by a third-party auditor approved by CARB. A copy of the complete, audited GHG emissions inventory, including the name of the auditor, must be provided in connection with the disclosure.
• CARB must contract with an emissions reporting organization to develop a reporting program to receive and make publicly available the required disclosures.

While this Bill in many ways reflects the provisions of the SEC’s proposed rulemaking, it goes beyond what the SEC would require in two significant aspects. First, the Bill requires reporting entities to disclose not only scope 1 and scope 2 emissions, like the SEC’s rule, but it would also require disclosure of scope 3 emissions—those produced not by the reporting entity, but by the customer or supplier. The SEC rule would only require disclosure of scope 3 emissions if those emissions are material or if the entity has set a GHG emissions target or goal that includes scope 3 emissions. However, the Bill does not include such limitations, which could mean that a much wider range of scope 3 emissions will be subject to disclosure obligations. This could dramatically increase a reporting entity’s emissions, and result in a significant increase in what is being disclosed—as well as a significant increase in administrative burden on reporting entities.

Second, the Bill would require both publicly traded and privately owned companies to disclose their emissions, while the SEC’s rule would only apply to publicly traded companies. This would significantly increase the number of entities that are subject to the disclosure requirements. California’s economy alone is one of the fifth largest in the world, and nearly every large U.S. company does business in the state, so the Bill, if passed, will impact a significant number of businesses.

While the SEC’s rule remains on pause, California is poised to be the first U.S. government entity to mandate comprehensive climate disclosures.  However, a bill with similar provisions to this Bill was previously defeated in the Assembly last session, so it is possible that this Bill will face the same fate; we will just have to wait and see.

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The New York Stock Exchange (“NYSE”) and Nasdaq filed amendments to their proposed rules requiring that all listed companies adopt adequate clawback policies on executive compensation.[1] Under the amended proposals, these listing standards would become effective on October 2, 2023 and companies would be required to adopt compliant clawback policies on or before December 1, 2023 (60 days after the effective date).[2] 

What is the clawback requirement?

As required by Section 10D of the Exchange Act, the proposed listing standards require recoupment if incentive compensation paid to an executive officer was calculated based on financial statements that were required to be restated due to material noncompliance with financial reporting requirements and that noncompliance resulted in overpayment of the incentive compensation within the three fiscal years preceding the date the restatement was required.

Restatements that trigger clawbacks include accounting restatements that correct an error in previously issued financial statements, or “Big R” restatements, as well as accounting restatements that correct an error not material to the previously issued financial statements that result in a material misstatement if the error was left uncorrected in the current period or the error correction was recognized in the current period, or “Little r” restatements.

What issuers are covered?

All listed issuers are subject to the clawback requirement with limited exceptions.  This includes foreign private issuers, smaller reporting companies, emerging growth companies and controlled companies.

Who is subject to the clawback policy?

All current and former executive officers must be covered by the clawback policy.[3] The definition of executive officer is identical to the definition of a Section 16 officer under the Exchange Act. [4] This will include, at a minimum, the executive officers named by the issuer in its Form 10-K or proxy statement.

What is “incentive-based compensation”?

Incentive-based compensation refers to compensation (cash or equity) that is granted, earned or vested based wholly or in part upon the attainment of any financial reporting measure.

Incentive-based compensation excludes compensation that is not based on achievement of a financial reporting measure, such as base salary, discretionary bonuses, or time-based awards, as well as awards based on subjective standards, strategic or operational measures.

When is incentive-based compensation deemed “received”?

Incentive-based compensation is deemed “received” in the issuer’s fiscal period during which the financial reporting measure specified in the incentive-based compensation award is attained, even if the payment or grant of the incentive-based compensation occurs after the end of that period.

How is the amount of clawed back compensation measured?

The recoupment amount is equal to the incentive-based compensation received that exceeds the amount of incentive-based compensation that otherwise would have been received had it been determined based on the restated amounts and must be computed without regard to any taxes paid.

How is recovery determined for incentive-based compensation tied to stock price or TSR (total shareholder return)?

If the incentive-based compensation is tied to stock price or TSR the recoupment amount must be derived from reasonable estimates of the effect of the accounting restatement on TSR and the issuer must maintain documentation of this estimation and provide this documentation to the exchange.

What time period must be covered by the clawback policy?

The policy must apply to any incentive-based compensation received (as defined above) during the three completed fiscal years immediately preceding the date on which the issuer is required to prepare an accounting restatement.

When is an issuer “required” to prepare an accounting restatement?

The company is required to prepare a financial statement upon the earlier of the following:

• the board of directors, a committee thereof, or authorized officers concluded or reasonably should have concluded that the issuer is required to prepare an accounting restatement due to material noncompliance of the company with any financial reporting requirement; [5] or
• a court, regulator, or other legally authorized body directs the company to prepare an accounting restatement.

Is the issuer required to seek recovery of erroneously received incentive-based compensation?

Yes, issuers must take steps towards recovery reasonably promptly with very limited exceptions.[6] There is no exception for de minimis amounts.

Do companies have discretion regarding the means of recovery?

Yes, as long as the erroneously received incentive-based compensation is recovered reasonably promptly, the issuer has discretion regarding the appropriate means of recovery.  For example, equity awards could be forfeited, shares received could be returned or proceeds from the sale of erroneously received shares could be repaid.

Can an issuer indemnify its current or former executive officers against the loss of any erroneously awarded incentive-based compensation?

No.

What are the consequences of failure to adopt and comply with these listing requirements?

Listed issuers will be subject to delisting from Nasdaq or NYSE, as applicable, if they fail to adopt a compliant clawback policy within 60 days of the effective date or fail to enforce their clawback policies.

When are the new listing standards effective?

If approved by the SEC, the NYSE and Nasdaq listing standards will become effective on October 2, 2023 and issuers will be required to adopt compliant clawback policies on or before December 1, 2023 (60 days after the effective date).

What are the disclosure obligations?

Issuers will be required to file their clawback policy as an exhibit to their annual report on Form 10-K.  Additional disclosure will be required if an executive officer is subject to recoupment under the policy, including the aggregate dollar amount of the erroneously awarded incentive-based compensation, how it was calculated, and information regarding amounts not yet recovered.

What steps should issuers consider?

Issuers should consider taking the following actions:

• update the board of directors, audit and compensation committees regarding the new clawback requirements and the expected effective date;
• confirm the process to adopt a compliant policy or amend any exiting clawback policies to comply with the new requirements;
• review existing incentive compensation programs to identify metrics that will constitute incentive-based compensation subject to recoupment under the policy; and
• consider implementing documentation of any discretionary awards made by the compensation committee that would not be subject to the clawback policy.

Summer associate Paul Tetenbaum co-authored this blog post.

[1] NYSE 303A.14; Nasdaq 5608

[2] Section 10D to the Securities Exchange Act of 1934, which was effective on January 27, 2023, directed national securities exchanges and associations that list securities to establish a written clawback policy that requires each listed issuer to develop and implement a policy providing for the recovery of erroneously awarded incentive-based compensation received by current or former executive officers.

[3] Incentive-based compensation received by a current executive officer while they served in a non-executive capacity is not susceptible to being clawed back under these new rules. Former executive officers are individuals who have left the company but received incentive-based compensation within the three fiscal years preceding the accounting restatement.

[4] This means that individuals who are Section 16 officers but not deemed executive officers by the issuer, such as a non-executive controller, will be subject to potential recoupment under the clawback policy.

[5] If the issuer is required to file a Form 8-K to report non-reliance on previously issued financial statements under Item 4.02(a) the date should coincide with the occurrence of the event described in that item.

[6] The three permissible exceptions are (i) the issuer reasonably determines that the expense paid to a third party to recover the incentive compensation would exceed the amount of the incentive compensation to be recovered, making recovery impracticable (ii) the recovery of the incentive compensation would violate a law of the issuer’s home country that was passed before the final rule is published in the Federal Register and (iii) the recovery of the incentive compensation would cause an otherwise tax-qualified retirement plans to fail to meet qualification requirements.

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• The SEC adopted final rules that seek to modernize and improve disclosures related to stock buyback programs. The enhanced disclosure will require domestic issuers to:
  • Disclose aggregate daily quantitative repurchase data on a quarterly basis;
  • Indicate if certain directors or officers traded in the relevant securities within four business days of the public announcement of an issuer’s repurchase plan;
  • Provide narrative disclosure regarding (i) the issuer’s objectives or rationales for its share repurchases and (ii) any policies and procedures relating to purchases and sales of the issuer’s securities; and
  • Provide quarterly disclosure regarding trading plans intended to satisfy the affirmative defense conditions of Rule 10b5-1(c).

______________________________________________________________________________________

The U.S. Securities and Exchange Commission (SEC) has adopted final rules that seek to modernize and improve disclosures related to stock buyback programs. The rules apply to all domestic issuers, Listed Closed-End Funds and Foreign Private Issuers (FPIs).

The enhanced disclosure will require domestic issuers to:

• Disclose aggregate daily quantitative repurchase data on a quarterly basis in an exhibit to their Form 10-Q and Form 10-K (for an issuer’s fourth fiscal quarter);
• Check a box indicating if certain directors or officers traded in the relevant securities within four business days before or after the public announcement of an issuer’s repurchase plan or program (or an increase to an existing program);
• Provide narrative disclosure regarding (i) the issuer’s objectives or rationales for its share repurchases and the process or criteria used to determine the amount of repurchases and (ii) any policies and procedures relating to purchases and sales of the issuer’s securities during a repurchase program by its officers and directors, including any restriction on such transactions; and
• Provide quarterly disclosure regarding an issuer’s adoption or termination of trading plans intended to satisfy the affirmative defense conditions of Rule 10b5-1(c).

Quantitative Repurchase Disclosure

Item 601 of Regulation S-K was amended to add a new Exhibit 26 to Form 10-Q and Form 10-K that will require tabular disclosure of repurchase activity in the quarter on a daily basis and will include:

• Average price paid per share;
• Total number of shares purchased, including the total number of shares purchased as part of a publicly announced plan;
• Aggregate maximum number of shares (or approximate dollar value) that may yet be purchased under a publicly announced plan;
• Total number of shares purchased on the open market; and
• Total number of shares purchased that are intended to qualify for the Rule 10b-18 safe harbor; and
• Total number of shares purchased that are intended to satisfy the affirmative defense conditions of Rule 10b5-1(c).

Issuers will also be required to note whether any of its directors and Section 16 officers (for domestic corporate issuers and Listed Closed-End Funds), or directors or senior management that would be identified pursuant to Item 1of Form 20-F (for FPIs, whether filing on the forms exclusively available to FPIs or on the domestic forms) purchased or sold shares or other units of the class of the issuer’s equity securities that are registered pursuant to Section 12 of the Exchange Act and the subject of a publicly announced repurchase plan or program within four business days before or after the issuer’s announcement of such repurchase plan or  program or the announcement of an increase of an existing share repurchase plan or program by checking a box before the tabular disclosure of issuer purchases of equity securities.

Listed Closed-End Funds will include the repurchase data in their annual and semi-annual reports on Form N-CSR. FPIs reporting on the FPI forms will disclose the data in a new Form F SR, which must be filed within 45 days after the end of an FPI’s fiscal quarter.

The daily quantitative repurchase data required by the final amendments will be treated as filed in Form 10-Q, Form 10-K, Form N-CSR, and Form F-SR (not furnished as originally proposed.)

Narrative Disclosure

The amendments will eliminate the current requirements in Item 703 of Regulation S-K, Form 20-F, and Form N-CSR to disclose monthly repurchase data in periodic reports. Instead, the final amendments require an issuer to include narrative disclosure of:

• The objectives or rationales for its share repurchases and the process or criteria used to determine the amount of repurchases; and
• Any policies and procedures relating to purchases and sales of the issuer’s securities during a repurchase program by its officers and directors, including any restriction on such transactions.

Additionally, the final amendments require disclosure of the number of shares purchased other than through a publicly announced plan, and the nature of the transaction (e.g., whether the purchases were made in open-market transactions, tender offers, in satisfaction of the issuer’s obligations upon exercise of outstanding put options issued by the issuer, or other transactions), and certain disclosures for publicly announced repurchase plans, including:

• The date each plan or program was announced;
• The dollar amount (or share amount) approved;
• The expiration date (if any) of each plan;
• Each plan that has expired during the period covered by the table; and
• Each plan or program the issuer has determined to terminate prior to expiration, or under which the issuer does not intend to make further purchases.

Issuer 10b5-1 Plan Disclosure

New Item 408(d) will require quarterly disclosure in periodic reports on Forms 10-Q and 10-K (for the issuer’s fourth fiscal quarter) about an issuer’s adoption and termination of Rule 10b5-1 plans.

Issuers are also required to provide a description of the material terms of the plan (other than terms with respect to the price at which the party executing the respective trading arrangement is authorized to trade), such as:

• The date on which the registrant adopted or terminated the Rule 10b5-1 trading arrangement;
• The duration of the Rule 10b5-1 trading arrangement; and
• The aggregate number of securities to be purchased or sold pursuant to the Rule 10b5-1 trading arrangement.

If the disclosure provided pursuant to Item 703 contains disclosure that would satisfy the requirements of Item 408(d)(1), a cross-reference to that disclosure will satisfy the Item 408(d)(1) requirements.

Issuers will be required to tag the information disclosed pursuant to Items 601 and 703 of Regulation S-K, Item 16E of Form 20-F, Item 14 of Form N-CSR, and Form F-SR in a structured, machine-readable data language, with detail tagging required for the quantitative amounts disclosed within the required tabular disclosures and block text tagging and detail tagging of required narrative and quantitative information.

Compliance Dates

Domestic issuers will be required to comply with the new disclosure and tagging requirements in their periodic reports on Forms 10-Q and 10-K (for their fourth fiscal quarter) beginning with the first filing that covers the first full fiscal quarter that begins on or after October 1, 2023.

FPIs that file on the FPI forms will be required to comply with the new disclosure and tagging requirements in new Form F-SR beginning with the Form F-SR that covers the first full fiscal quarter that begins on or after April 1, 2024. The Form 20-F narrative disclosure that relates to the Form F-SR filings, which is required by Item 16E of that form, and the related tagging requirements will be required starting in the first Form 20-F filed after their first Form F-SR has been filed. Listed Closed-End Funds will be required to comply with the new disclosure and tagging requirements in their Exchange Act periodic reports beginning with the Form N-CSR that covers the first six-month period that begins on or after January 1, 2024.

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• Since Friday, March 10, 2023, more than 300 public companies have filed current reports on Form 8-K regarding the closure of Silicon Valley Bank (“SVB”).
• Company disclosure in these 8-Ks falls essentially into four categories: (i) no commercial relationship with SVB; (ii) minimal commercial relationship with SVB and minimal exposure to deposit risk; (iii) significant commercial relationship with SVB with some deposit/loan risk, not anticipated to be material; and (iv) significant commercial relationship with SVB with deposit/loan risk that is expected to be material.
• While much of the immediate crisis appears to have abated, in the days ahead, public companies should be mindful of current and potential future disclosure obligations related to the SVB receivership.

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Since Friday, March 10, 2023, more than 300 public companies have filed current reports on Form 8-K regarding the closure of Silicon Valley Bank (“SVB”). Company disclosure in these 8-Ks falls essentially into four categories: (i) no commercial relationship with SVB; (ii) minimal commercial relationship with SVB and minimal exposure to deposit risk; (iii) significant commercial relationship with SVB with some deposit/loan risk, not anticipated to be material; and (iv) significant commercial relationship with SVB with deposit/loan risk that is expected to be material. The overwhelming majority of filings fall into the first two categories and some companies have amended previously filed 8-Ks to report full access to deposited funds following the adoption of emergency measures by the Treasury, Federal Reserve and FDIC.

While much of the immediate crisis appears to have abated, in the days ahead, public companies should be mindful of current and potential future disclosure obligations related to the SVB receivership. Areas to consider include:

• The potential need or desirability of voluntary (Item 7.01) Form 8-K disclosure regarding ongoing exposure related to SVB accounts to facilitate discussions with stockholders and analysts without running afoul of selective disclosure rules.
  • Companies should identify areas of focus, such as availability of funds under existing credit facilities in which SVB is a lender, and determine what is material for purposes of Regulation FD.
• Triggering events requiring Form 8-K filings related to existing credit facilities and loan documents such as:
  • potential defaults resulting from the transfer of funds out of SVB accounts that could trigger an Item 2.03 Form 8-K
  • termination of SVB agreements that could trigger an Item 1.02 Form 8-K
  • removal or replacement of SVB as a lender under a credit facility or loan agreement that could trigger an Item 1.01 Form 8-K
• For companies that have not yet filed their annual reports on Form 10-K, consider if additional risk factors are warranted and review and update MD&A to reflect any updates to the liquidity section. Companies with longer timelines prior to their next periodic report may take a wait-and-see approach to assess the fallout and avoid the need to correct or amend prior disclosures.
• For companies that are engaged in or expect to be engaged in registered offerings (or have ATMs or other ongoing offerings), consider what disclosure needs to be filed and incorporated into effective registration statements to update the company’s disclosure, including as to their cash management practices.

We will continue to provide updates on our SVB Developments resource page. Should you need any assistance with the questions above or if you would like assistance considering your specific situation, please contact a member of the Foley Hoag capital markets team.

Disclaimer
The information provided herein is made available for general informational purposes only and is not intended to constitute specific legal, financial or business advice, or to be a substitute for advice from qualified counsel or other advisers. Without limiting the foregoing, this information may not reflect recent developments in the law, may not be complete, and may not be accurate in or applicable to your jurisdiction or banking relationship. Because this information is general in nature and may not pertain to your specific circumstances, you should not act or refrain from acting based on any information without first obtaining advice from professional counsel or other advisers qualified in the applicable subject matter and jurisdictions. Foley Hoag has a policy of entering into attorney-client relationships with its clients only in accordance with certain procedures, which include executing an engagement letter and addressing conflicts of interest. You agree that your receipt of this information does not create an attorney-client or other fiduciary relationship between you and Foley Hoag.

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Newly adopted Item 402(x)(2) of Regulation S-K imposes a significant new executive compensation disclosure requirement on public companies. Under new Item 402(x)(2), companies must disclose in their annual reports, on a grant-by-grant basis for the CEO and each other named executive officer, every option, stock appreciation right or similar award that is granted shortly before or after the disclosure of material nonpublic information. (The rule generally does not apply to other awards, such as restricted stock awards, that do not have an exercise price.) The relevant disclosure period starts four business days before the filing or furnishing of any Form 10-K, Form 10-Q or Form 8-K and ends one business day after the filing date (for a total period of six business days, including the filing date). Technically, the new rule does not apply to a Form 8-K that does not disclose material nonpublic information, but we expect that most companies will presume, at least initially, that the information in each Form 8-K is material and nonpublic for this purpose.

The SEC’s purpose behind this new disclosure requirement is to give companies another reason not to “spring-load” stock options. A company spring-loads a stock option by granting that option before the announcement of material positive news, thereby fixing the exercise price before an anticipated jump in the stock price. This new disclosure requirement builds on the position the SEC staff took in Staff Legal Bulletin No. 120, which indicated that grant-date fair values of spring-loaded options may not comply with generally accepted accounting principles if they are not adjusted to reflect the impact of material nonpublic information. If the threat of a possible restatement were not enough, the new disclosure requirement may help to draw a map for a potential SEC enforcement action or shareholder lawsuit.

Companies must present the new disclosures in a table, which will include the grant date, the number of options, the exercise price, the grant-date fair value and, most significantly, the percentage increase in the closing price of the underlying shares between the trading day immediately before the disclosure of the material nonpublic information and the trading day beginning immediately after that disclosure. This last requirement will highlight the degree to which the options may have been spring-loaded, and the disclosure of large percentage increases may draw the attention of both regulators and shareholders.

We expect that most companies will seek to minimize any disclosures under new Item 402(x)(2), and an additional new disclosure requirement will encourage them to do that: Item 401(x)(1).

Newly adopted Item 401(x)(1) requires companies to disclose their “policies and practices” regarding the timing of awards of stock options in relation to the disclosure of material nonpublic information, and whether and how they take material nonpublic information into account when making such awards. Few companies will be eager to state or imply that they are not thoughtful about the timing of stock option grants, so we expect that more companies will migrate to a practice of structuring option grants to occur at least two business days after each annual or quarterly filing in order not to trigger the new disclosure requirements under Item 402(x)(2). This practice should generally mitigate potential allegations of spring-loading. However, companies that possess material nonpublic information that is not ripe for disclosure when they file their annual or quarterly reports (such as a potential material transaction still under negotiation) will have to take additional steps to avoid triggering the new tabular disclosure requirement.

The new rule leaves numerous unanswered questions. Item 402(x)(2) does not expressly apply to the filing of amendments to the underlying forms, nor does it expressly apply to proxy statements, even those that are intended to satisfy the requirements of Part III of Form 10-K. Curiously, the final rule does not address press releases, which often generate significant movements in stock prices and could similarly implicate potential spring-loading.

The new requirements also do not address “bullet-dodging,” another concern the SEC staff expressed in the rulemaking release. Bullet-dodging is the practice of deferring a stock option grant until after the disclosure of material unfavorable news so that the exercise price will be fixed only after the stock price has dropped. The staff may be caught by the conundrum that a common practice for avoiding spring-loading – i.e., following a routine of deferring the grant date until after full disclosure – can result in bullet-dodging when the market reacts negatively to an announcement.

These new disclosure requirements do not apply to foreign private issuers. For domestic issuers that are not smaller reporting companies, the new rules apply to the Form 10-K that covers the first full fiscal period that begins on or after April 1, 2023 (i.e., for calendar year companies, the Form 10-K covering 2024 that will be filed in 2025). For smaller reporting companies, the new rules apply to the Form 10-K that covers the first full fiscal period that begins on or after October 1, 2023 (i.e., for calendar year companies, also the Form 10-K covering 2024).

While the transition period affords companies some time to modify their option granting practices, companies will adapt in different ways, with some opting for rigid policies and others seeking to retain maximum flexibility. Please reach out to your Foley Hoag attorney if you need help designing a solution that works for your company.

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